01 June, 2016
Japan has been more aggressive in its attempts to kick start economic growth than any other nation. Since Prime Minster Shinzo Abe took office in December 2012 and nominated Haruhiko Kuroda to head the Bank of Japan, markets have watched to see whether their experiments might be successful in turning Japan around.
They have certainly given it a good go! Kuroda has been prepared to use the central bank's cheque book to buy all the bonds that the government has chosen to issue (as much as 80 trillion yen a month). This massive debt hasn't cost the Government anything since interest rates have now been close to zero for several years.
Has it worked? A bit. Share and property prices initially rose very strongly and trends in corporate earnings were among the strongest in the world.
Earlier this year Kuroda stepped it up a notch. With the weakness in global growth and wobbly share markets, the Bank of Japan took the fresh step of buying government bonds at negative interest rates. So now the Japanese government gets to borrow and pay back less than 10 years later!
Now the only tool left is to move from lending money for nothing to giving it away. The Bank of Japan could consider printing money and handing it out to people, making it the first economy to actually deploy so called "helicopter money".
Unfortunately there is a historical precedent which may cause Mr Kuroda to think twice. A similar strategy was used in the 1930s by the Bank of Japan head Takahashi and views on its success are mixed. While Abe credits Takahashi with saving Japan from the great depression, others point to the rampant inflation that followed (and Takahashi's untimely assassination!).
Our view is that as Japan continues to experiment, things will get messier before they get better. We have only a small exposure to Japanese companies, very little in Japanese bonds and any exchange rate risk is largely hedged.